Potash Collapse Signals Buy Not Build for Vale: Corporate Brazil

Turmoil in the global potash market
is creating an opportunity for Vale SA to buy assets at a
discount as the mining company leads Brazil’s bid to become
self-sufficient in crop nutrients.

Vale, whose output at Brazil’s only potash mine dropped for
the past three years, should abandon plans for greenfield
projects and consider instead purchasing existing producers or
their assets, according to Stifel Nicolaus & Co. Potash
companies are trading at a “great discount,” making
acquisitions a cheaper option for Vale than starting from
scratch, said Terence Ortslan, managing director of research
firm TSO & Associates.

Vale suspended two potash projects in Argentina and Canada
worth $8.9 billion in the past year as cost increases made the
ventures unfeasible. Fertilizer producer shares have slumped 14
percent on average since July 30 when OAO Uralkali ended output
restrictions through a venture with Belaruskali, triggering
speculation prices would tumble. Their average price-to-book
ratio fell to 1.69 yesterday from 2.55 at the end of last year.

“It’s tough to justify the economics of a new project at
today’s pricing,” Stifel Nicolaus analyst Paul Massoud said by
telephone from Washington. “Looking at more established
producers, if they can get the balance sheet to work, is the
right way to go.”

Fertilizer Losses

Vale isn’t changing its strategy of seeking low-cost potash
projects and maintains the business among its five main areas of
focus, Chief Executive Officer Murilo Ferreira said during a
conference call Aug. 8. While taking a cautious approach, the
company is actively looking at potash growth options, head of
fertilizers and coal Roger Downey said on the same call. Roberto Moretzsohn, commercial director for fertilizers, echoed those
comments in Sao Paulo yesterday.

Fertilizers generated a net loss for the Rio de Janeiro-based company in the three quarters through June 30, according
to data compiled by Bloomberg. Vale produced 233,000 metric tons
of potash from its Taquari-Vassouras mine in northeastern Brazil
in the first half of the year, 5.3 percent less than the
previous year. It’s targeting 550,000 tons this year, similar to
last year and 23 percent below a 2009 record.

Import Dependent

“I would go with buying an existing producer,” he said
by telephone. “I am sure it would be a serious consultation in
any major company because you have seen a major drop in the
market cap of the companies.”

Vale’s press department in Rio declined to comment further
on potash expansion plans.

Brazil, the world’s largest producer of coffee and sugar,
has said that boosting potash output is a priority to help
reduce its dependence on imported nutrients. Amid record crops,
Brazil boosted imports of potassium chloride to $1.65 billion in
the first half, 20 percent more than a year earlier, according
to the Development, Industry and Trade Ministry.

Brazil spent $8.58 billion in fertilizer purchases last
year, its sixth-most imported item. Latin America’s largest
economy imports more than 90 percent of its potash needs and 75
percent of its nitrogen-based fertilizers supplies, according to
industry association ANDA.

Brazil Discount

“No potash project in Brazil is competitive now, and
things tend to get even more difficult after Uralkali’s
decision,” Mario Barbosa, who headed Vale’s fertilizers
businesses until 2011, told reporters in Sao Paulo yesterday.
“Potash prices have slumped and will continue dropping.”

Soc. Quimica & Minera de Chile SA, Latin America’s biggest
fertilizer producer, is in talks to sell potash in Brazil for as
much as a 10 percent discount on July prices, said two people
with direct knowledge of the process. Plant Bem Fertilizantes
SA, based in the southern farming state of Parana, may pay SQM
$375 to $380 a ton for a 15,000-ton shipment, from $400 to $415
last month, said one of the people, who asked not to be
identified because the talks are private.

Vale should focus on delivering the heavy investments
needed to expand its iron-ore business rather than making
additional acquisitions, Oliver Leyland, who helps manage
Brazilian stocks including Vale shares at Mirae Asset Global
Investments, said by phone from Sao Paulo.

‘Reassess Strategy’

Moretzsohn told an event in Sao Paulo yesterday that Vale
will press on with its potash projects as it assesses the impact
of Uralkali’s decision. The company should rethink that strategy
as average annual prices are headed for another 11 percent drop
next year, Stifel Nicolaus’ Massoud said.

“If they are serious about their claim of wanting to
become a big, major fertilizers producer, they are going to have
to do something about potash,” he said. “I just don’t think
that building is the way to do it.”